Morning Comment: What is the Nasdaq's Recent Action Telling Us?

Political games by Democrats in Congress created yet another substantial decline in the U.S. stock market yesterday as the DJIA and S&P 500 fell about 3%. Don’t get us wrong, we do believe that “emission standards” are very important for our environment, but trying to add a provision on this issue for airlines to the virus relief package at the last second was pure politics. Playing politics at the time of a national emergency is inexcusable.

Now we have Speaker Pelosi rolling out her own stimulus plan. In other words, it's pretty obvious to us that the Democrats are delaying this process because they want to make sure that President Trump doesn’t get all the credit for any positive resolution to this national emergency. They sat on their hands at the height of last week’s problems…and now they’re trying to play catch-up. (They sat on their hands so that they could play the “blame game” later on. They thought President Trump was going to shoot himself in the foot. Now that the Trump Administration and the Fed have put forth powerful plans to deal with this crisis…while the Democrats sat on their hands…the Dems have shifted their strategy from the “blame game” to the “taking credit game.” They want to be able to take some credit if things work-out well…which they could not have done given their actions in previous weeks.) Usually we’d say, “That’s politics.” However, in a time of national emergency, we call it irresponsible.

Anyway, we disagree with those who are saying that it is too early to start buying stocks. As we have stated several times over the past few days, we do NOT think this is a time to jump back into the market with both feet. However, holding off…and trying to pick the exact bottom in the market…is a fools errand. Yes, the market could fall another 10%-15% over time…but now that the stock market is down about 34%, it’s time to start nibbling in the stocks of strong companies with great balance sheets in our opinion. Again, this should be done in a very gradual “scale-down” fashion…but waiting for the stock market to fall 50% from the highs…WHICH MAY NEVER HAPPEN…is not a smart way to try to take advantage of this down-turn in the markets.

We believe it is particularly important to take this tact right now because we are finally seeing signs that the decline is starting to lose some steam…and that we’ll see a short-term bottom at some point very soon. We readily agree that the stock market almost always see a “retest” (or even an undercut of the “first low”) before we get the ultimate bottom in the market. However, the key word in that last sentence is “almost.” For example, in 2018, there was never a “retest.” Therefore, we believe that “tipping one’s toe” back into the market at current levels is a good idea. You can buy more at lower levels if the market does indeed decline further….but if the history of the last two bear markets is any guide, the stock market is going to be higher two years from now than it is today…EVEN if it ends up falling more than 50%!

So what are the signs that we could/should see a near-term bottom soon? Well, as we highlighted over the weekend, the first signals that an upcoming bottom (at least a short-term one) is in the offing was the capitulation we saw last week. The “internals” of the market showed that the stock market was becoming “washed-out.” Second, as we mentioned yesterday morning, the big decline in the stock market is going to create some significant buying power before the end of the quarter (which takes place a week from today)…as the certain sizable investors will HAVE to re-weight their portfolios to get them back in line with their pre-set parameters. That will mean give the market some significant fuel.

Some other things to consider are that several good indictors of risk…like the Korean won…are beginning to show signs that they are stabilizing. More importantly, it’s great to see how the Nasdaq has been trading recently. Since last Monday’s close, the S&P 500 has fallen 6.23%...while the Nasdaq Composite has only declined 0.64%!!! From the February all-time highs to the March 16th lows, the S&P 500 & the Nasdaq had declined the exact same amount (29%). However, over the past six trading days, the Nasdaq has outperformed the S&P by a significant margin. That’s impressive.

We’d also note that the unlike the S&P, the Nasdaq has NOT broken below its 2018 lows. In fact, it still remains comfortably above that low…by about 10%!!! Yes, we understand that the Nasdaq rallied in a more than the S&P did off the 2018 lows, so it was further away from those lows when it topped out. However, in other severe declines over the past 20 years, whenever the Nasdaq has outperformed on the way up, it then badly underperformed on the way down. This did not happen this time around.

There was a time in our careers when we would have said that the fact that the Nasdaq was not underperforming on the way down was a negative development. We would have said that it was a sign that investors were too complacent…because the Nasdaq was where the riskier companies were all listed. TODAY, however, those tech companies are the backbone of our economy. So the fact that the tech-laden Nasdaq has been acting better for more than a week now…is something that should give investors at least a little more confidence as we move through this crisis.

Of course, just because the futures are trading a lot higher this morning does not mean that they’ll stay higher all day today. Let’s face it, the S&P futures were trading more than 90 points higher when we woke up Friday morning…only to see the market roll-over in a substantial manner and close well into negative territory by the end of the day that day. Besides, the Democrats could easily continue to play their ridiculous games.

However, after suggesting that investors raise cash in the weeks leading up to the February highs, we are now firmly saying that investors start to pick away in the stocks of good companies with strong balance sheets, lots of cash, and great management teams. Even if the market sees another down-turn in the weeks/months ahead, buying at least some of your favorite names should work out well over the very-long-term. (Besides, it looks like Bill Ackman has covered any sizeable short positions he might have had on last week.) Either way, we believe a strong bounce is coming quite soon…one that will finally last more than one day. (Charts below.)

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Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Mar 24, 2020 — 8:03 AM
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